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With a Scandal-Ridden Banking Sector, Moldova is a Hotspot for Counterparty Risk

Matei Rosca & Francis Ian Garrido

Regulators have been trying to clamp down on financial malfeasance in Moldova, but industry experts suggest that counterparty risk in the country remains stubbornly high, putting its domestically owned banks under pressure.

In 2014 Moldova experienced perhaps the most dramatic bank fraud in recent memory: about $1 billion disappeared from Banca de Economii SA, BC Banca Sociala SA and Banca Comercială UNIBANK SA, which were the country's largest lenders at the time and are now shuttered. A report by forensic accountants at Kroll shed some light on the events leading up to the bank failures: Unknown perpetrators inside the three banks appear to have coordinated a huge outflow of unsustainable loans to suspicious entities, which then passed loan receipts from the banks through "a complex web of transactions." In the aftermath, the lenders were depleted of real liquidity, leaving them insolvent and requiring an $870 million state bail-out to rescue depositors.

To help pick up the pieces, Sergiu Cioclea, formerly an executive at BNP Paribas SA, was appointed governor of Moldova's central bank in March with a mandate to increase enforcement action.

The three remaining domestically-owned banks — BC Moldova Agroindbank SA, BC Moldindconbank SA and Banca Comerciala Victoriabank SA — have all been put under special supervision by local regulators for issues such as alleged lack of transparency around ownership structures, concerted shareholder activities and transactions with related parties.

At Agroindbank, the central bank took action in March against a group of its shareholders for neglecting to seek regulatory approval before working in concert to build up a combined holding of about 40% in the lender. Their voting rights and other privileges have been suspended. Meanwhile, Moldova's finance regulator, the Financial Market Commission, canceled a package of shares representing a 3.53% stake in the bank because they were improperly acquired, according to official documents. The central bank now controls Agroindbank and is looking discreetly for investors to take it over, according to two sources with knowledge of the matter.

Natan Garștea, CEO of financial research firm Estimator VM in the capital city of Chisinau, said in an interview that Agroindbank is the healthiest bank in the country in terms of capital, having come out of the $1 billion fraud scandal unscathed. But he noted that it has been dragged into other controversies due to its lack of transparent ownership disclosure.

Despite the questions over Agroindbank, the European Bank for Reconstruction & Development, known for its expertise in investing in risky markets, said it would consider buying into the lender, under certain conditions. "We would consider [backing Agroindbank] alongside a strategic investor who we would invest with simultaneously, financial institutions for the West Balkans, Belarus, Moldova and Ukraine, told S&P Global Market Intelligence.

Moldindconbank, Moldova's second-largest lender, is also looking for a buyer, but sources with knowledge of the business told S&P Global Market Intelligence that there are questions over its asset quality due to alleged lending to parties related to the shareholders. An audit by KPMG also found that its insufficient ownership disclosure is in breach of regulatory guidelines, one source explained.

Garștea said there is widespread belief in Moldova that Veaceslav Platon, a local millionaire, was the de facto owner of both Moldindconbank and Agroindbank, although he has denied the claims publicly multiple times.

Aside from the concerns about banks, Garștea said political instability makes entering into any financial deal in Moldova risky.

These factors, together with alleged connections to several international money-laundering cases, mean that prospective Moldindconbank buyers would have to do "very thorough due diligence," Garștea said.

The bank, in statements sent to S&P Global Market Intelligence, denied that there were problems with its capital base and said the company respects all laws and regulations.

There are problems, too, at Victoriabank, the only other sizeable active Moldovan bank. The largest shareholder, Cyprus-based Insidown Ltd., with a 39.2% stake, is engaged in a dispute with the EBRD, which is aiming to impose more transparent governance at the company. To help in that effort, the EBRD increased its stake in the lender to 27.5% by buying out the shares of Greece-based Alpha Bank AE.

Victoriabank's board has not been functional for the past few years, the EBRD's Russell said. Apart from Insidown, shareholders do not have a say in how the bank is run, he added, while claiming that Insidown is controlled by Sergey Lobanov, a Russian businessman with Kremlin ties.

Aside from the concerns about banks, Garștea said political instability makes entering into any financial deal in Moldova risky. He pointed to, for example, how there is no significant parliamentary opposition to the alliance in power and described the current political atmosphere as "volatile," with frequent street protests against a government that some locals consider to be illegitimate.

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But Russell also underscored the promising regulatory efforts. "The situation can be turned around relatively quickly if the actions taken by the authorities are forceful, [which would] probably draw interest from investors fairly quickly," he said, adding that the EBRD has been frustrated by lack of reaction from Moldovan regulators in the past but now it had faith that Governor Cioclea will "enforce the rules of the game." after having discussions with him.

Russell said that during a meeting with Cioclea, the central banker "gave the impression that he took the transparency of bank shareholding very seriously and he did promise he would make it a priority of his first days to help the situation."